I don’t have much invested in traditional public equity markets, just a handful of relatively small positions in my (self-directed) pension fund. I haven’t done any robust analysis but my intuition tells me that my average holding period for these positions is probably around 2-3 years, with perhaps a bit of trading (lightening up or adding to existing positions) one or twice a year. And watching the markets from the sidelines over the past month or so certainly hasn’t made me regret this modest, passive allocation. When massive, mature companies trade up and down by 10 or 20% in a period of days – with no or little company specific news, confidence in the market’s ability to set prices in an orderly fashion clearly goes out the window. Indeed, the (public) equity markets are dangerously close to losing their ability to provide one of their key benefits: price discovery. And if/when this comes to pass, there will be serious knock-on effects on their other prime (and beneficial) function of capital allocation (and providing access to capital to companies and access to companies to investors.)
The risk is that a tipping point is reached at which the traditional public equity markets cease to be relevant venues for raising capital or investing. As many people have recently remarked (Kill the Quants Before They Kill Us, Beat high-frequency trading machines by not playing their game, etc.) possibly the key driver of this trend is the relentless increase in algorithmically-driven machine trading (high-frenquency or otherwise.) Now don’t get me wrong, I am neither a luddite, nor am I fundamentally opposed to these trading strategies; rather all other things being equal I would probably consider myself a proponent. In moderation, these types of trading strategies add both liquidity and heterogeneity to the market and as such help create a more robust trading ecosystem. But recently, the equilibrium of this system has come unstuck. Anecdotally, it is now assumed that upwards of 60% of trading volumes on the main public stock exchanges are accounted for by algorithmic/machine-directed trading. On some days and in some stocks, I understand that this can be as much as 80+%.
And most of these strategies don’t involve any judgement as to the valuation per se of a company; basically, as the Onion put it so brilliantly many years ago: they are just “trading” a “blue line”.
NEW YORK–Excitement swept the financial world Monday, when a blue line jumped more than 11 percent, passing four black horizontal lines as it rose from 367.22 to 408.85.
So nobody is actually setting the price! (…or more accurately, the “price-setters” in the markets are mostly being overwhelmed by the trend-trading machines.) This does have the side effect of creating real trading and investment opportunities for on the one hand a small number of smart nimble day traders and on the other hand a small number of very long term investors (who have the luxury of having deep pockets and patience) but for the vast majority of investors (professional or private) the market dynamics and extreme short term volatility make participation more and more painful. This is particularly the case in a low-return environment such as today. Clearly execution (entry and exit points) have always been important, even to long term investors, but never have they been make or break like they have been in August: who cares if you have a carefully crafted investment thesis that predicts a 20-40% appreciation over 2-3 years in Company A when depending on the day of the week on which you entered the position, the thesis is rendered somewhat moot by a 20% swing in the share price.
And it’s no wonder that strong, growing private companies are often loathe to have their shares listed: what right-thinking CEO wants to deal with that insanity???
So what’s the solution? I don’t pretend to have an answer, but I do have a couple suggestions that perhaps point in the right direction for smarter people than I to develop into actionable plans:
design structural dampeners (through exchange rules and regulations) that limit the volume of algorithmic trading to some maximum proportion (to be A/B tested to find the optimal point – 40? 50? 60? percent?); this could also be a dynamic number, for example increasing or decreasing with intraday volatility to damp same
encourage the continued development of private secondary markets (SharesPost, SecondMarket and others) and help to develop them as real alternatives (and complements) to traditional public equity markets.
It’s really important that our global capital markets operate robustly and efficiently. In fact it’s never been more important. I believe that reasonable, robust solutions exist (or can be developed.) But I fear that the inertia and prejudices of entrenched incumbents (exchanges, banks, regulators, governments and investors) will make finding these solutions exceedingly difficult. I hope I’m wrong. Until then, be careful out there (and think about re-allocating some of your capital to the private markets; you’ll sleep better at night!)
Markets in compute power, much talked about by me and others are now it seems finally here (from The Economist:)
Fundamentally, SpotCloud works like other spot markets. Firms with excess computing capacity—operators of data centres, cloud providers, hosting firms—put it up for sale. Others, who have a short-term need for some number-crunching, can bid for it. Enomaly takes a cut of between 10% and 30% depending on the size of the deal. But there is an important difference: SpotCloud is what Enomaly calls an “opaque market”, meaning that the firms offering capacity do not have to reveal their identity. Thus selling computing services for cheap on SpotCloud does not cannibalise regular offerings.
I haven’t had much time to write in the last few months, part of the unavoidable occupational hazards of building a business and a company, but I felt almost obliged to comment on the latest round of major financial exchange consolidation as the author of the 2005 “Amazonbay” video…
So what was my initial reaction? Completely underwhelmed. The question that immediately popped into my head was: “Is that it???” Is that the most exciting, most optimal path to future growth that these management teams and their armies of advisors could come up with? And if so, what next? Even theoretically, only one more iteration of the global consolidation game exists and I’m not sure anyone would really advocate for a monolithic NYSEEuronextDBCMESGXetc… So the question that still will haunt the new, bigger boardrooms is not answered but only postponed: whither future growth in an increasingly commoditized business??
Don’t get me wrong, it’s a hard question. I don’t have an answer either. But you won’t be surprised if I suggest that it is probably to be found in thinking about post-consolidation de-consolidation aimed at creating new companies focused on various horizontal layers in the stack. Indeed, if the only path possible to get to a very small handful of global core exchange platforms was this flurry of mergers, then perhaps it was not all in vain. I would accept that in this layer of the “exchange stack” there is truly economies of scale, much as for instance with core communication infrastructure.
But then I would suggest that management of these platforms then needs to focus intensely on dis-investing themselves of other layers of the stack where economies of scale are less in evidence or absent completely. I don’t want to be cynical but giving the combination of normal 20th century management dynamics (bigger is better) and the particular emotio-political aspects of the exchange business, I would be very surprised to see anything like this happen. If I were a shareholder of any of these companies my fear would be that any of the advantages that arise from these combinations are ultimately subsumed by the disadvantages engendered by complexity (in every dimension.)
Giant financial exchanges – like the giant banks – aren’t going to disappear overnight. Possibly never. But to frame the debate in this “new” vs “old” / “mammal” vs “dinosaur” context is to miss the point. There are dozens of good (and some less good) reasons why these incumbents will be very hard to dislodge, and to focus on this – while potentially entertaining – skirts around the really interesting question which is to ask: where (and by whom) will value be created in digital transaction execution and management over the the next decade or two?
I don’t envy the management teams that lead these exchanges – they are forced to operate in a highly constrained political and cultural space and having fairly recently lived through the golden age for their traditional business model would seem – at least in the short term – to have huge asymmetrical downside in terms of the world’s expectations for them. Not fun.
There are some very interesting opportunities for these giant trading platforms in the years ahead. I just think that things will have to get a lot worse first before the management of these firms are in a position to act on these opportunities and think laterally. Or should I say horizontally!
Two trading firms, one of them an established Wall Street player and the other a Midwest upstart, are each about to premiere a sophisticated new financial tool: a box-office futures exchange that would allow Hollywood studios and others to hedge against the box-office performance of movies, similar to the way farmers swap corn or wheat futures to protect themselves from crop failures.
The Cantor Exchange, formed by New York firm Cantor Fitzgerald and set to launch in April, last week demonstrated its system to 90 Hollywood executives in a packed Century City hotel conference room….
…On Wednesday, Indiana company Veriana Networks, which says its management includes “veterans of the Chicago exchange community,” unveiled the Trend Exchange, its own rival futures exchange for box-office receipts.
These are exactly the kind of novel risk management marketplaces that will continue to emerge over the next 5 to 10 years as technology enables robust, easy and cost-effective trading and settlement mechanisms and data (which is the raw material of any exchange or risk management toolkit) continues to grow in size, richness and availability across every sector of the economy. Indeed the greatest impediment to the development of such markets is cultural: there is still an irrational, sometime hysterical, aversion to any risk management tool that is non-traditional and can be characterized as gambling. Of course gambling, trading and hedging are indistinguishable in practice and can only be differentiated in context, and really only represent differences in intent. As such, it is very difficult to proscribe one while allowing the other(s). There are however reasonably good, tried and tested regulatory frameworks that have been developed over decades to manage unhealthy practices (insider trading, market abuse, etc.) in traded markets for outcomes and commodities. Using these, regulators should be happy to quickly approve as many new marketplaces or exchanges as creative entrepreneurs and traders invent and let a thousand flowers bloom. I don’t think it is for the regulators to second-guess who might be interested in trading such markets and why, as long as the market rules and framework are robust, transparent and participants are swiftly held accountable for any abusive behavior.
But that certainly isn’t the way the establishment sees things and even those that are developing new markets often see their market as an exceptional addition to the risk management landscape rather than a specific example of a more general case. (Although to be fair this may be simply a tactic to curry favor with the forces defending the status quo in order not to appear to be too heretical and so smooth approval for their specific new initiative.)
“The day that a widow or orphan bets against ‘Finding Nemo 3′ — that’s not a good day,” said Rob Swagger, Veriana’s chief executive.
Why? Why shouldn’t anyone be able to put their knowledge and insights to work to make a return. Why is it ok for a ‘widow or orphan’ to bet on GE’s future performance (by buying or selling their shares) but not to bet on the potential return of a film? It simply doesn’t make sense. Or the view that certain risks or outcomes are worthy of being traded and managed but not others?
Government authorities have generally approved only those futures exchanges that allow for the redistribution of a preexisting risk. Sports betting is not approved because, unlike a farmer selling a futures contract to offset losses from crop failure, neither party involved in the wager has an economic interest in the underlying event.
This statement is of course patently ridiculous. Many, many agricultural risk contracts are traded amongst principals who are neither producers nor end consumers, and to say that there is no ‘real world’ economic risks that could be managed via sports trading is just silly given that sports is an enormous, global business with hundreds of billions of dollars of capital at risk. And if that weren’t enough, it is happening anyways, with admittedly high risks of fraud and abuse. Wouldn’t it make more sense (in the context of protecting vulnerable market participants) to encourage regulated, robust, well monitored marketplaces rather than cling to the current Potemkin-esque prohibition? (Disclosure: I am a shareholder in Betfair.)
In any event, I can only endorse Cantor’s vision of creating a new, more vibrant and useful market for managing risk and structuring finance in the entertainment industry:
Now Cantor hopes for its exchange to be the first of many complex financing products for the entertainment industry. In one of the more ambitious plans, Jaycobs wants to team with filmmakers to create something like an initial public offering of stock in a specific film, staking out a potential new way to finance production.
And I hope they (and Trend Exchange,) working along side the CFTC are able to quickly illustrate that well-built and well-regulated marketplaces can mitigate the potential dangers while at the same time providing a powerful and useful set of tools for managing risk and generating returns. Perhaps this will help pry open the door to seeing more and more outcome markets develop of the course of the next several years.
Five years ago I wrote a thought piece called ‘Through the Looking Glass’ to provoke non-linear thinking and foster debate on the possible future direction of the financial services industry and market structures. (I later turned it into a short video called AmazonBay.) It was a retrospective told from the point of view of an observer in 2015. It was never meant to be taken literally – in particular with respect to (most of) the specific corporate mergers – rather I used these as a concise and dramatic way of highlighting the possible or even probable consequence of the deep secular currents that I felt would inevitably work to reshape the landscape.
(December 2015:) …The global securities and investment banking groups that dominated the market in the last century are now extinct. In their place we have an intelligent galaxy of new specialist advisory, investment management, algorithmic software and consulting firms networked with a universe of powerful transaction facilitation exchanges. Banks now exist only as giant regulated pools of capital.
Following the sweeping banking reforms proposed last week by President Obama, and the fact that we are now halfway to this hypothetical future, I thought it might be worth doing a quick mark-to-market of how my ideas have lined up with reality.
stock exchange consolidation and emergence of new exchange venues (A-) pretty close both in outcomes and timing – the major stock exchanges have been merging a-go-go while at the same time new trading venues have proliferated, and exchange (or quasi-exchange) trading of new asset classes continues to develop strongly.
sports/outcome trading in US legitimized (B-) my narrative had this happening in February 2010, not there yet but Congressman Frank’s bill might open the doors later this year and the trend seems to be on the right track and will probably be signed into law by Obama (!); as an aside was way early on a Betfair IPO…
giant bank mergers followed by break-up of vertically integrated universal banks, with Goldman Sachs leading the way (A) we have seen the big get mostly even bigger (RBS/ABN, BoA/ML, Barclays/Lehman…and while JPMorgan didn’t buy MS, they did get Bear Stearns and WaMu); GS hasn’t yet broken itself into three as predicted but I’m still confident it will lead the way when/if industry structure changes, and more generally the trend of regulatory thinking across the globe is definitely a trailing wind for the kind of change I envisioned. The 2010-2012 timeframe for the re-organization of global banks is probably a bit early but plausibility has certainly gone up (from near zero) significantly since I wrote this.
more (and more) algorithmic / automated intermediation of markets (A-) this was obliquely referenced in my article but was really at the heart of the idea that this fictional ‘AmazonBay’ platform would end up dominating this aspect of markets; clearly the market is heading this way – in fact it may seem obvious now but most people did not fully understand this even as little as five years ago.
Amazon anything (B+) The jury is probably still out on this one, but in my view it is looking increasingly likely that Amazon.com will become a giant of the next economic paradigm; whether or not they use their vast intellectual and technological resources to participate more directly in the financial services arena is not yet clear, but I can tell you the only ‘big company’ job I would not hesitate for two minutes to accept if it were offered would be CEO or CSO of Amazon Financial Services (AFS) Jeff are you listening?
(Note: Remember I used real company names mainly to add vividness to the ideas underlying the narrative. The key concept I wanted to convey with this GS break-up vignette was that the vertically integrated model would decompose under the light of new technology and regulations into a (technology-centric) Sales & Trading component, a more focused, relationship driven Advisory component (cf. the emerging proliferation of pure advisory ’boutiques’) and independent, conflict-free Asset Management businesses (cf. the secular growth of hedge funds and Barclays sale of BGI, etc.))
(February 2009:) …Reacting to new competition, Goldman Sachs becomes the first major investment bank to break itself up. Securities and distribution are sold to Ebay Financial Markets, while the remaining activities are split into two new companies: GS Advisory Services and GS Capital management…
eBay anything (D) Despite the fact that the actual companies cited are more symbolic than literal, the choice of eBay to represent the cutting edge of online, data-driven, algorithmic marketplaces was simply awful. To the extent that it risks distracting the viewer from the key, underlying messages. It is now entirely implausible and so instead of bridging the cognitive gap, the inclusion of eBay simply extends it. Thank goodness this is somewhat mitigated by my inclusion of Amazon.com (see above) as the other new markets avatar but they come late to the narrative…
sports trading developing as an asset class (C+) this clearly hasn’t happened, although there are one or two small funds and firms offering managed accounts; and a vibrant ecosystem of professional traders and the associated software has emerged around the Betfair and other exchange platforms. In my defense, I picked sports as just a provocative and emotionally attractive example of the idea that – enabled by technology – a vast array of new tradable markets in goods but also outcomes, would emerge. Work in progress.
credit crunch and asset bubbles (D) although the overall purpose of the piece was to provoke thinking on the sustainability of existing business models in financial services in the face of radically shifting underlying technological, economic and demographic trends, I failed to include a thread touching on the possibility of catastrophic systemic discontinuities arising as a result of the prevailing market structure and business models. It’s a significant ommission, especially as at the time of writing this I was in the process of exiting my former responsibilities as a senior executive in the credit business due in part to my increasing discomfort with the sustainability and prudence of the risk pricing in that market.
All in all, I would give myself a mid-term grade of B+/A- with room both to improve and to slip back. Mostly on the right track, especially with respect to big themes but perhaps a bit optimistic in terms of some of the timelines. What do you think? Better? Worse? To be fair, the correct measuring stick is not so much whether or not I was right or wrong, even in terms of ‘macro’ predictions but whether or not this article and video helped catalyze serious discussion, debate and thought about the potential for disruptive and non-linear change in the financial services industry. Alas I have no idea how one could even attempt to measure that, but any thoughts or anecdotes you might have with respect to this would of course be appreciated.
Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.
I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.
Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)
yoonew is the world’s first futures exchange for event tickets. We have created a dynamic marketplace that helps online consumers save money and time when buying and selling tickets. Our real-time trading platform gives fans, traders, and resellers a safe and transparent place to trade tickets.
We are passionate about leveling the playing field and creating a fair marketplace where everyone has equal access to tickets. Our team focuses on building new product features that will bring transparency to markets where pricing information is not universally available. We help customers make more informed purchasing decisions so they are confident that their purchase or sale concluded at a fair price.
I’m not 100% convinced that they’ve nailed it but it is certainly a very interesting step in the right direction in terms of introducing modern (and useful) markets technology into the historically moribund market for live event tickets. Essentially, they are selling call options on tickets to major sporting events. Moreover they have taken an original and clever approach by – at least initially – focusing on major sporting events (like the Super Bowl) where the terminal value of the underlying is different depending on the buyer. ie If “your” team gets through to the game, the tickets are of more value to you. Of course, with a properly functioning secondary market (irrespective of whether on yoonew’s upcoming secondary exchange or another market – StubHub, etc.) financially this should be irrelevant – the ‘market’ value of the tickets depends only on the clearing price of the event once the participants are known. (ie Super Bowl tickets on balance will be worth more if two teams with big, passionate fan bases are playing as opposed to two teams from smaller markets; NY v New England more valuable than Kansas City vs Detroit for example.) So a ‘rational’ trader would try to buy the cheapest options – not necessarily the option on his team, especially if you could re-sell the option before delivery. (I’m not sure this is allowed, if not it should be.) Nonetheless, the (marketing) focus on ‘real’ end buyers (people that hope to take delivery, rather than just make a financial profit) is a good angle as it plays to the psychology of ‘hedging’ rather than speculating and should add heterogeneity to their risk book.
Notwithstanding the ridiculous US laws proscribing trading on sporting outcomes, there would also potentially be very interesting arbitrage and hedging opportunities (for both yoonew as the market-maker and their customers) with trading sports risk. For example (using the same teams as above) going long New England and NY to make the Super Bowl to hedge the extra cost of delivering tickets to this pairing (vs a less valuable team pairing.) Or going long the team in the host city (which would also probably be more valuable on delivery if they ended up playing.) I’m not sure if they have any plans to offer markets on European (or global) events – it would have been great for the recent Rugby World Cup, imagine if England fans could have bought (what would have been) cheap options on the final in Paris – but if they did they could use Betfair to manage their price risk today.
Longer term, ideally you would hope that sports teams and leagues would embrace this kind of market to help manage their own pricing risk. Instead of just selling tickets (in the primary market), they could sell options on tickets and use secondary markets to dynamically hedge their risk. For a team that didn’t sell out systematically, it would be a good way to monetize potentially empty seats and even for teams that sold out perennially it would allow them to be more aggressive in finding the ‘true’ equilibrium clearing price for a given seat. For investors it would be another potential (uncorrelated) asset class to trade and invest in. I wonder what the implied volatility curve on the NY Giants season would look like? Gamma trading based on the weekly game results anyone? The question is do the owners and managers of these teams understand how this could work to everyone’s benefit or will they stick to the old model of static seat prices and unoptimized revenue management?
I hope yoonew succeeds and helps to develop a more enlightened and efficient market for tickets in live events. One to watch.
I am fascinated by the application of modern information and communications technologies to help improve the lives of some of the world’s poorest and ‘infrastructurally challenged’ (don’t know if this term has been used before but seems to encompass the fundamental problem that holds back the people in developing countries from improving their economic prospects.) To be able to succeed (in providing meaningful, affordable, services) in such challenging environments to my mind offers great insights into how improvements can be made to how services are designed and sold in any environment – including the developed and wealthy western markets. A variation on the New York, NY theme of – ‘if you can make it here, you can make it anywhere’…
the Village Phone extends regular base station cellular coverage from around 15 kilometers to around 30 kilometers through the use of a village phone kit – an antenna and ten meter cable (shown above) and a coupler (shown below) connected to a regular Nokia 1100 mobile phone plus of course, a micro-finance loan. The net result? In a number of cases it provides the first convenient, reliable and affordable connectivity to the outside world for many rural communities as well as providing a stable income for the local entrepreneur that takes out the loan.
He also goes on to mention the development of essential services facilitated by access to mobile communications:
One example of the benefits of connectivity? Sente – the transfer of money via mobile phone that essentially also extends regular banking services such as the remittance of cash to these communities.
Another exciting initiative I stumbled accross (at the excellent Timbuktu Chronicles) is Sevak Solutions “commitment of developing the product specifications, business plans, and financial requirements to create an open architecture transaction system [for microfinance institutions.]” Rather than paraphrase, Sevak Solutions describe themselves as follows:
Sevak Solutions is a start-up initiative that has emerged from a consortium of microfinance institutions seeking to understand the role technology could play in scaling microfinance. Early work demonstrated a need for alternative, low-cost transaction solutions and business models that addressed the needs of microfinance institutions that do not have the client volumes required to afford, or piggy-back on, existing payment systems. Sevak Solutions is focused on interoperability, open architecture systems that can connect to cell phones, point-of-sale terminals, ATMs, or any other access devices available in the market. The company performs its own in-country research and development, supports technology innovators that are attempting to enter the market, and provides strategic and implementation consulting on a global basis. Sevak Solutions is interested in promoting a set of technologies and migratory path for microfinance institutions and microfinance banks to expand their reach to the unbanked.
So here is a non-profit organization focused on developing open-source solutions in order to open access to the formal global financial system to anyone, anywhere, irrespective of their wealth. Bringing banking to the unbanked. Historically one of the great impediments to economic progress has been the lack of a cost-effective and robust financial infrastructure, Sevak seems to be taking direct aim at contributing significantly to solving this problem. I hope they succeed. Will they build the equivalent of Linux or WordPress for banking/transaction processing? I hope so, I will certainly try to follow their progress and they are definitely on my ‘find out more’ list.
As if it weren’t long enough already, another initiative that bounced on to my ‘find out more’ list earlier this year when I read about it in the Economist is TradeNet, a new mobile2mobile trading platform for farmers and traders in Africa founded by Mark Davies:
TradeNet, a software company based in Accra, Ghana, will unveil a simple sort of eBay for agricultural products across a dozen countries in west Africa. It lets buyers and sellers indicate what they are after and their contact information, which is sent to all relevant subscribers as an SMS text message in one of four languages. Interested parties can then reach others directly to do a deal.
Listing offers is free, as is receiving the texts. TradeNet plans to earn revenue by putting advertisements in the messages, though it hopes the service will become so useful that recipients will eventually want to pay. For the moment, though, the company is busy signing up users and swallowing the cost of sending the messages.
I have to admit this is one of those ‘I-wish-I-had-done-that’ companies. The potential for this kind of platform seem to me to be enormous. I’ll leave it at that for now. Very exciting stuff.
NEW YORK, Jan 27 (Reuters) – New York Stock Exchange Chief Executive John Thain on Friday told CNBC he expects consolidation among exchanges in the next year or two, and he thinks there could be synergies between the United States and Europe.
The NYSE is in the final stages of closing its deal to buy electronic trading company Archipelago Holdings Inc. (AX.P: Quote, Profile, Research), which will turn it into a publicly traded, for-profit company.
Thain, speaking from Davos, Switzerland, said he expected that deal to close a couple of weeks after the regulatory comment period ends on Thursday.
The deal means “we have public shareholders, and we will be responsive to them, and we will operate more efficiently,” Thain said. “But more importantly, we will have a much broader list of products, and as the world of exchanges consolidates, we will be one of the players.”
Over the next year or two, he thinks there will be consolidation in the United States and “across the ocean.”
There could be synergies between the United States and Europe, he said, as a lot of companies trade in both places and there were opportunities on the technology side to share best practices.